Asset Protection in a Bear Market

Recent events have been alarming and historic in scope: Bear Stearns, Lehman Brothers, IndyMac and Washington Mutual, all once pillars of our financial system, have failed. The federal government bailed out AIG, Fanny May and Freddie Mac. Countrywide, Merrill Lynch and Wachovia were forced to sell themselves rather than go under. The Dow is below 10,000. Layoffs are wide-spread in many industries. The foreclosure rate, unemployment rate and inflation are all increasing. The real estate sector is at its lowest point in twenty years.

You should be concerned about the protection and preservation of your assets in this environment. In this economy, the threat of creditors taking your assets is real and frightening.

You need asset protection if:

the value of your home has been reduced to less than the amount of your mortgage;

you are having trouble meeting your mortgage or other loan payments;

you are concerned about losing your job or your business;

the value of your retirement plan and investment portfolio has fallen to the extent that now your most valuable asset is your home;

you are facing a lawsuit;

you are in a profession with a high degree of liability (doctor, financial advisor, landlord, real estate developer, real estate investor).

Suppose that during the “good” economic times, say 2002 through 2007, you took out a mortgage to buy investment real estate with the hopes of “flipping it” for a profit. Now, you’re left with the property, but no prospects of selling it all, let alone for a profit. To make matters worse, when you took out that mortgage, the property was worth more than the mortgage, but now it’s worth considerably less. You cannot keep up with the mortgage payments.

In this scenario, the bank is likely to foreclose and you may lose the property. The bank will then go after you personally and will target your personal assets to cover the deficiency between the mortgage and the proceeds the bank receives from a foreclosure sale. It is important to “compartmentalize” your losses and prevent them from affecting your other assets.

You must protect your personal assets, such as your home and your liquid assets (bank and brokerage accounts). In other words, while you may not prevent the bank from taking the property, you can still prevent the bank from taking your other assets.

There are two options available for asset protection: domestic and offshore.

Domestic asset protection normally involves the transfer of assets into one or more Family Limited Partnerships. If set up correctly, Family Limited Partnerships are the most effective tool for domestic asset protection, in addition to providing estate planning and tax minimization benefits.
However, the effectiveness of Family Limited Partnerships may be limited with respect to pre-existing creditors, like the mortgage bank. In such a case, you may want to consider offshore asset protection. Offshore asset protection involves the transfer of liquid assets to one or more entities established in a confidential and secure foreign jurisdiction. This must be done with the help of professionals to avoid violation of the many complicated I.R.S. rules and regulations governing ownership and control of foreign entities.

While you are protecting your personal assets, it may also be possible to negotiate with the mortgage bank to achieve a “workout” or restructure of your loan. Such negotiations should be conducted by an attorney skilled in negotiation and experienced in dealing with banks. As asset protection lawyers, we can negotiate on your behalf with the mortgage bank in order to avoid foreclosure.

We can also help you challenge the foreclosure. In this economy, courts are increasingly pro-borrower and less sympathetic toward lenders. Courts are now recognizing claims by borrowers that mortgage brokers and banks over-reached; engaged in predatory lending; violated the federal Truth in Lending Act, Fair Debt Collection Procedures Act or Real Estate Settlement Procedures Act, or that they disregarded information that would have suggested difficulty of mortgage repayment. At the same time that we are negotiating with or challenging the bank, we can also protect and preserve your hard-earned assets from future creditors.

The best time to act is now, before claims are filed against you. If you are current on your mortgage, you are in the best position to protect your assets, because it will be difficult for a creditor to prove that you protected assets in order to avoid a debt that is not in default. However, if a claim already exists against you, for example if you’ve defaulted on the mortgage, you can still engage in asset protection; however, you may need more effective strategies like offshore asset protection.

Although the current financial environment brings unprecedented challenges, you need not sit back and watch the value of your assets decline and be exposed to predatory creditors. You owe it to yourself and your family to be proactive. First, protect and preserve your assets amidst the financial uncertainty. Next, negotiate with your lenders to restructure your loans and avoid foreclosure. If foreclosure is unfortunately upon you, challenge it, and at the same time make sure that your personal assets are protected from the bank’s reach. Qualified and experienced asset protection counsel can help you accomplish all of these goals, keeping creditors at bay and your assets secure for you and your family.